FX - The Week Ahead: Norway’s inflation surprised to the downside again, supporting a potential dovish pivot from Norges Bank

Another CPI undershoot, but inflation still stuck at 3%

• NOK: Norway’s September CPI inflation came at 3.0% YY, up from 2.6% in Aug, but 10bp below the Norges Bank (NB) forecast. Underlying CPI ATE eased to 3.1% YY from 3.2%, also undershooting the NB forecast, by 20bp. Services CPI remained strong at 3.8% up from 3.6% in Aug, though, with the softening driven by the goods (especially imported goods) sectors.
• NOK: Norway has long been seen as one of the last among advanced economies to reverse its monetary restraint, and the latest data adds further uncertainty into months of speculation over how much the central bank will trail its bigger peers like the Federal Reserve and the European Central Bank.
• NOK: Citi Research expect the ongoing disinflation trend, and more importantly the more decisive easing moves by other central banks, to support a dovish twist at the next Norges Bank meeting (7 Nov). Citi Research believes the Norges Bank will deliver a first rate cut in December, which is more dovish than the Norges Bank’s latest rate path. However, Citi Research also acknowledge that risks are for yet a further delay to the dovish pivot, given FX weakness and inflation being still stuck at 3%.

Week Ahead:

US – September inflation data

• USD: US September Retail Sales – Citi: 0.4%, median: 0.2%, prior: 0.1%, Retail Sales ex Auto – Citi: 0.1%, median: 0.1%, prior: 0.1%, Retail Sales ex Auto, Gas – Citi: 0.4%, median: 0.3%, prior: 0.2%, Retail Sales Control Group – Citi: 0.4%, median: 0.3%, prior: 0.3%, Aggregate consumer spending data has been resilient with goods spending increasing on a 3m moving average basis after some weakness during the first quarter of this year. Restaurant spending has weakened pointing to consumers pulling back on some discretionary spending. Citi Research expect total retail sales to increase by 0.4%MoM in September, continuing the recent growth in goods spending. Citi Research expect control group sales to keep increasing as well by 0.3%MoM. Nonstore sales will likely continue to contribute to growth in control group sales. Citi Research continue to see a softening labor market as the major downside risk to what has been resilient consumer spending.

Europe and UK – ECB rate decision, UK inflation and labor market data, Germany ZEW, EU summit, and Italy credit ratings review

• EUR: ECB rate cut — Benign inflation developments and concerns about the growth outlook should allow the ECB to cut all policy rates by 25bps again, taking the deposit rate to 3.25%. Citi Research expect no pushback against expectations for successive rate cuts also in December and beyond.
• GBP: UK: September Inflation — Citi Research expect services CPI inflation to further undershoot MPC forecasts in September, printing at 5.2% versus the 5.5% anticipated in the Bank’s August forecast. Here the key drivers are primarily a large drop in airfares, alongside what Citi Research think has been a decent pick-up in accommodation. Underlying services inflation will Citi Research think continue to moderate. Headline inflation Citi Research expect at 1.8% - a little below consensus. RPI Citi Research think will print around 2.8-2.9% YY, also a little below market pricing. With disinflation ongoing, the question is increasingly whether good incremental news alone is sufficient to push the MPC to cut consecutively, or whether the MPC feel they need to see more. Bailey’s speech suggests the former is conceivable. For now, Citi Research would need to see more evidence of such a shift before feeling confident.
• GBP: UK: Labour market news — On the labour market side, Citi Research expect a mildly hawkish release next week. Vacancies Citi Research think likely stabilized around 850k. The LFS employment growth measure likely accelerated further. Wage growth, on a sequential basis, may be marginally stronger than last month. Nonetheless, Citi Research expect the headline annual numbers to continue to fall. Of particular interest to us will be private sector payrolls – which Citi Research expect to continue to fall – and the claimant count. Further reductions and increases respectively Citi Research think should indicate a modest degree of continued labour market loosening.
• EUR: Germany: ZEW bounce — Investor confidence unusually decoupled from equity indices and the rival Sentix survey in September. With both measures improving further on the back of global rate cut expectations and China stimulus, Citi Research expect a large rebound in ZEW expectations for Germany and the Euro Area.
• EUR: EU summit 17-18 October — EU leaders will congregate on 17-18 October to discuss Ukraine, where pressure could be rising on Europe to adopt strategies that would be resilient to any US election outcome. The Middle East, the Draghi report on competitiveness, migration and foreign affairs, as well as country-specific recommendations as part of the fiscal framework are also on the agenda.
• EUR: Italy: S&P and Fitch rating reviews — Fiscal outcomes have been surprising positively this year, while GDP has remained resilient. Citi Research see scope for a mild upward rating trajectory ahead. Given stable outlooks, a change to a positive outlook is more likely as a first step, and S&P perhaps the most likely to move first.

Japan – CPI and trade balance

• JPY: Nationwide CPI September: Headline CPI, Citi Research forecast: 2.3%YoY, previous: 3.0%YoY, excluding fresh food, Citi Research forecast: 2.2%YoY, previous: 2.8%YoY, excluding fresh food and energy, Citi Research forecast: 2.0%YoY, previous: 2.0%YoY, Citi Research expect nationwide core CPI (excluding only fresh food) to increase 2.2% YoY in September, down from a 2.8% YoY rise in August. The resumption of government subsidies for electricity and gas bills probably slowed energy prices. Meanwhile, CPI excluding fresh food and energy likely increased 2.0% YoY in September, unchanged from August.
• JPY: Customs-clearance trade deficit September: Citi forecast: -¥212.1 bn NSA; -¥680.6 bn SA, previous: -¥703.2 bn NSA; -¥595.9 bn SA, The customs-clearance trade balance likely increased somewhat in September. The customs-clearance trade balance likely came to a ¥212.1bn deficit before seasonal adjustment and a ¥680.6bn deficit after it in September (-¥703.2bn and -¥595.9bn, respectively in August). The deficit after seasonal adjustment likely increased modestly. Citi Research expect both real exports and real imports to expand on a MoM basis. While Citi Research expect the negative impact of Typhoon No.10 in late August to reverse in September, automakers continued to suspend operations through early September. Citi Research therefore think exports expanded less than imports.

Commodity Bloc – NZ CPI, AU labor market data, Canada CPI

• NZD: NZ Q3 CPI, Citi QoQ forecast; 0.9%, Previous; 0.4%, Citi YoY forecast; 2.4%, Previous; 3.3%, Citi Research expect headline CPI to temporarily accelerate in Q3 by 0.9%. This follows on-average disinflation over the prior four quarters. The main difference is that in Q3 there was an increase in food prices that we estimate was 1.5%, largely due to higher fruit and vegetable prices. For comparison food prices rose by just 0.1% in Q2. Citi Research also expect a 1.5% increase in housing and utilities, greater than the 1.1% recorded in Q2. The increase reflects the seasonal increase in property rates and charges (+5.0%) alongside sticky rents and construction costs (+1.0%). Elsewhere, Citi Research look for increases in alcohol and tobacco (+0.8%), recreation and culture (+0.8%) and health (+1.0%) but declining prices led by petrol (-3.7%), diesel (-7.4%). We also expect clothing and footwear to decline (-0.6%) and for no change in communication prices.
• AUD: AU September Labour Force, Citi MoM employment change forecast; 39k, Previous; 47.5k, Citi MoM unemployment rate forecast; 4.2%, Previous; 4.2%, Citi MoM participation rate forecast; 67.2%, Previous; 67.1%, The September Labour Force Survey was conducted between 1-14 September, outside any major events or holiday periods, therefore, it should once again be a cleaner reading. In non-seasonally adjusted terms, September is generally a strong month of hiring ahead of the summer months. Thus, the seasonally adjusted number be slightly lower but Citi Research are expecting a larger rebound in employment growth in original terms, after it fell 25k in August (but +47k in SA terms).Citi Research also see a further uptick in the labour force participation rate in September while the underemployment and underutilisation rates are expected to remain steady.
• CAD: Canada CPI NSA MoM (Sep) – Citi forecast: -0.3%, median: -0.2%, prior: -0.2%, CPI YoY – Citi forecast: 1.8%, median: 1.9%, prior: 2.0%, Consumer Price Index – Citi forecast: 161.3, median: 161.5, prior: 161.8, After headline CPI touched 2.0%YoY in August, Citi Research expect it to fall below 2% in September at 1.8%YoY and with a 0.3%MoM decline. Weakness will partly be due to falling retail gas prices, which could rebound in coming months, but sub-target inflation could still be an important factor in BoC considerations for a larger 50bp cut at their October 23 meeting. Sub-2% inflation would exemplify the risk officials have been highlighting that softer activity data will imply a wider-than-necessary output gap and thus higher risk that inflation undershoots target.

Asia EM – China trade data

• CNH: China trade data September: Exports Citi forecast 6.0%YoY, previous 8.7% YoY, Imports Citi forecast 1.5%YoY, previous 0.5% YoY, Trade balance Citi forecast USD$89.5bn, previous USD$91.0bn, Exports growth could moderate to 6.0%YoY in September with less favorable base effect, while imports growth may stay low at 1.5%YoY. The trade surplus is projected to be ~US$89.5bn. China’s PMI sub-index for new export orders declined -1.2pp to the 7-month low in September. As a leading index, Korea’s export growth also slowed, pointing to global demand headwinds. Related, both US and EU Mfg. PMIs signaled deeper contractions.